For small business owners, keeping a close eye on financial numbers is crucial for maintaining profitability, ensuring sustainable growth, and making informed decisions. Tracking the right financial metrics helps you understand the health of your business, plan for taxes, manage costs, and execute your business plan effectively.
Here’s a guide on the key financial numbers your small business should monitor:
1. Revenue and Sales Figures
Revenue, or sales, is the total amount of money your business earns from its operations before any expenses are deducted. Tracking revenue helps you understand how well your business is performing and whether it’s meeting its sales targets. Regularly analyzing sales figures can also reveal trends, peak seasons, and areas where additional marketing efforts might be needed.
2. Gross Profit Margin
The gross profit margin is calculated by subtracting the cost of goods sold (COGS) from your total revenue and then dividing that number by the total revenue. This metric shows the percentage of revenue that exceeds the cost of producing goods or services. It’s a crucial indicator of how efficiently your business is producing and selling its products and services. Monitoring this margin helps in pricing decisions and cost management.
3. Operating Expenses
Operating expenses include all costs associated with running your business, such as rent, utilities, salaries, and marketing. Tracking these expenses helps you manage your budget and identify areas where you might be overspending. Up to 90% of companies, for example, don’t know how much they’re spending on printing costs. Regular reviews of these financial metrics can also help you make adjustments to control costs and improve your overall profitability.
4. Net Profit and Profit Margin
Net profit is the amount of money left after all expenses, including operating costs, taxes, and interest, have been deducted from your revenue. The net profit margin, calculated as net profit divided by total revenue, represents the percentage of revenue that remains as profit. Monitoring these figures provides insight into your business’s overall financial health and its ability to generate profit after covering all expenses.
5. Cash Flow
Cash flow is the movement of money into and out of your business. Positive cash flow means you have enough cash to cover your expenses and invest in growth opportunities. Tracking cash flow helps ensure you can meet your financial obligations and avoid liquidity problems. Regularly reviewing cash flow statements can help you anticipate cash shortages and manage your working capital more effectively.
6. Accounts Receivable and Accounts Payable
Accounts receivable refers to the money owed to your business by customers for goods or services delivered but not yet paid for. Accounts payable represents the money your business owes to suppliers or vendors. Tracking these accounts helps you manage cash flow, ensure timely payments, and follow up on overdue invoices. Efficient management of receivables and payables is essential for maintaining a healthy cash flow.
7. Tax Planning and Obligations
Tax planning can help with four types of financial goals: college, a primary or second home, retirement, and a small business venture. Effective tax planning involves estimating your business’s tax liability and setting aside funds to cover it. Tracking taxable income, understanding deductible expenses, and keeping accurate records of all financial transactions can help you minimize your tax burden and avoid penalties. Regular consultations with a tax professional can ensure you stay compliant with tax laws and make the most of available deductions.
8. Budget vs. Actual Performance
Comparing your budgeted figures with actual performance helps you understand how well your business is adhering to its financial plan. This comparison allows you to identify variances, assess the effectiveness of your budgeting, and make necessary adjustments. Regularly reviewing budget vs. actual performance ensures that you stay on track with your financial goals and business plan. In fact, a business plan creates a 30% greater chance of your business’ overall growth.
9. Key Performance Indicators (KPIs)
KPIs are specific metrics that reflect the success of various aspects of your business. Common KPIs include customer acquisition cost, customer lifetime value, and return on investment (ROI). Tracking these indicators helps you gauge the effectiveness of your strategies, improve decision-making, and focus on areas that drive business growth.
10. Business Plan Financial Projections
Your business plan should include financial projections such as sales forecasts, profit margins, and cash flow statements. Regularly revisiting and updating these projections helps you measure progress, adjust strategies, and plan for future growth. Accurate projections guide your business decisions and help you set realistic financial goals.
Tracking these essential financial metrics allows you to manage your small business effectively, make informed decisions, and achieve long-term success. Regular monitoring, coupled with strategic planning and analysis, will keep your business on the path to financial stability and growth.
